Budget 2018 – Spotlight on Charity Tax

In the Budget 2018, it was announced that the government is set to introduce a package of measures aiming to reduce the administrative burdens on charities.

Key changes include:

1. Increase in Small Trade Exemption

Charities that undertake small-scale trading activities that do not relate to their primary purpose may qualify for relief under the “Small Trade Exemption”. Where this relief is available, income falling within the limits will be exempted from corporation tax.

From April 2019, the Small Trading Tax Exemption limits will be increased as follows:

Current Limits

Annual Charity Income

Maximum non-primary purpose trading

Under £20,000

£5,000

£20,001 – £200,000

25% of annual turnover

Over £200,000

£50,000

New Limits from April 2019

Annual Charity Income

Maximum non-primary purpose trading

Under £32,000

£8,000

£32,001 – £320,000

25% of annual turnover

Over £320,000

£80,000

As these exemption rates have been set at the same level for almost 20 years, the increase in limits are a welcome announcement for charities undertaking miscellaneous trading activities.

2. Relaxation of Administration for Retail Gift Aid Scheme

From April 2019, charity shops using the Retail Gift Aid Scheme to sell goods will be able to send letters to donors every three years when their goods raise less than £20 per year, rather than every tax year.

What is the Retail Gift Aid Scheme?

As Gift Aid only applies to gifts of money by an individual, charities are unable to claim Gift Aid on donations of physical items, such as clothes, toys, and books.

Instead, the charity shop can offer to act as an agent for the donor and sell the items on their behalf, so that in effect at the point of sale the funds actually belong to the individual.

Once the donated items have been sold, if the owner agrees to donate the sale proceeds to the charity then Gift Aid can be claimed on the net sale proceeds, subject to the other conditions for Gift Aid being met.

Charities are required to send letters to donors to notify them of the proceeds raised from selling their goods and to request that they contact the charity if, due to a change in circumstances, they need to cancel their Gift Aid declaration.

3. Increase Gift Aid Small Donation Limit

The Gift Aid Small Donation Scheme enables charities to claim 25% on cash donations and contactless card donations under a specific limit without a Gift Aid declaration.

From April 2019, the individual limit will be raised from £20 to £30 (i.e. to align with the contactless transaction limit).

4. Simplification of Donor Benefits Rules

A charity is unable to claim Gift Aid on a donation where the donor receives a benefit (e.g. a “thank you” gift) unless the donation is worth significantly more than the value of the benefit.

From April 2019, the donation categories have been reduced from three to two, with the set value cap of £25 for donations between £100 – £1,000 being removed.

Current Rules

Under the current rules, there is a mix on monetary and percentage thresholds that charities must consider when determining the value of benefit they can give to donors:

Donation

Benefit Value Cap

Up to £100

25% of donation

£101 – £1,000

£25

Over £1,000

5% of donation (limited to £2,500)

For example, where an individual makes a donation of £90, the maximum value they can receive is £22.50 (i.e. £90 x 25%). Where they make a donation of £110, the maximum value they can receive is £25.

New Rules

Under the new rules, the first £100 of the donation will remain at 25% of that amount. However, charities can also offer an additional benefit of 5% to donors on the amount that exceeds £100.

The maximum value of the benefit that a donor can receive remains at £2,500.

This means that for a donation of £950, where previously the benefit value was limited to £25, under the new rules the benefit can receive a benefit of £67.50 (i.e. (£100 x 25%) + (£850 x 5%)).